Is This Stock the Buy of the Decade?

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For Chesapeake Energy Corporation (NYSE:CHK), the stories of the past few years have been mostly about the firm’s survival. Ongoing concerns about its ability to continue came to a head as prices for oil and natural gas tanked in 2015. Those lower prices were met with an insanely high debt load created during the go-go days of the fracking boom.

Bankruptcy was truly on the table, and CHK stock plunged all the way down to roughly $1.50 per share.

But with oil prices rising, CHK has seemed to have gotten its mojo back. Cash flows are strengthening, and bankruptcy risk is well off the table. So much so, that Chesapeake Energy could be back on the path to growth. That’s right, CHK is expanding into new shales.

For investors, this could be the confirmation we’ve been waiting for.

Chesapeake Energy Finally Expands

It’s amazing what higher energy prices can do. One of the hallmarks of Chesapeake’s turnaround was that cash flows from these higher prices have helped push back the tide faster. CHK has used the extra money to fund its capex programs and ultimately pay down its massive debts.

At one time those debts were close to $21 billion. Thanks to asset sales — which were valued more at higher oil prices — and higher operating cash flows, CHK was able to reduce those debts by about half. Moreover, higher prices will help Chesapeake Energy achieve free cash flow neutrality next year.

With its debt down, cash flows rising and two consecutive quarters of recorded profits, CHK is in a position to do something it hasn’t done in what seems like forever — expand into new shales.

Taking some of its operating cash flows earmarked for exploration, CHK has headed west out to Wyoming — to the state’s coal-rich Powder River Basin (PRB). Chesapeake currently has 307,000 net acres in the PRB and has now begun drilling the initial test wells.

So far, the results are great.

The initial drilling in the Turner Sandstone region of the PRB came in at 2.325 barrels of oil equivalent (BoE) per day. That’s pretty darn good and was well above the initial estimates predicted by CHK. The real win is that Chesapeake expects that the highly productive wells — about 300 on its drilling schedule — have a breakeven point of around $35 per barrel.

This low breakeven point ensures that when CHK starts ramping up production that they’ll make money for the firm. Even better is that the wells are mostly oil and natural gas liquids (NGLs) rather than lower-priced dry natural gas.

But CHK isn’t done in the PRB: The Turner Sandstone is only about half of that 300,000-plus acre stack in owns.

The firm has already started drilling production wells in the Sussex with its $40 breakeven point as well as the prolific Niobrara. Add in new drilling programs in the Mowry and Parkman shales, and CHK has plenty of potential — about 2.7 billion barrels worth — in the region. This already profitable expansion would not have been possible without the moves it made to sell junk assets and reduce its debt costs.

In the end, CHK estimates that it will be able to grow production by 10% this year and an additional 20% through 2018. That’s a big 180-degree turnaround from just kicking the can and potentially filing for bankruptcy.

Chesapeake Energy Is Risky, But Worth It

All of this has been possible thanks to rising crude oil prices. The risk is that any meaningful drop could undermine the progress made at CHK. And investors were concerned about that risk so far in 2017 and prices have dropped meaningfully. So far, Chesapeake Energy stock is back down to that $5 per share mark.

But as we argued, today’s Chesapeake isn’t the same company as even a year ago. The energy stock has used the past year or so, to meaningfully change its dynamics and has become a much “leaner and meaner” animal. That’s been shown by its recent profitable expansion plans.

And at $5 per share, investors seem confused on what they are actually buying. That’s the price for debt ridden Chesapeake, not this leaner animal. That could be why analysts now estimate that CHK could double given its positives. And I think it could too.

The bottom line: CHK is once again in growth mode and no one is given it any credit. Chesapeake could be the buy of the decade in the energy patch at these prices.

As of this writing, Aaron Levitt is long the Vanguard Energy ETF (VDE), which holds CHK stock.